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Against the Grain

International rice and wheat prices have doubled or tripled in the last two years, but world grain production will reach a record high this year. So how come millions are falling into poverty and starting food riots across the world? The answer lies not in any outsized surge in world demand or fall in world supply, but in the fact that several countries have imposed duties, quotas and outright bans on agricultural exports. This has reduced the amount of grain available for world trade.

The United Nations Food and Agriculture Organization estimates that world production of cereals was a record 2,108 million tons in 2007, and will hit a new record of 2,164 million tons in 2008. Rice production will rise by 7.3 million tons and wheat by 41 million tons. World cereal consumption has been growing slightly faster (3%) than production (2%) for a decade, so global stocks have fallen to 405 million tons. But this is not a disaster scenario, and it hardly explains skyrocketing prices.

In the U.S., one-fifth of the corn crop has been diverted to ethanol, and in Europe, some vegetable oil has been diverted to biodiesel. These ill-conceived policies have induced farmers to switch significant acreage from wheat to corn, soybeans and rapeseed, but world wheat output has nevertheless risen from 596.5 million tons in 2006 to an estimated 647.3 million tons in 2008. Corn-based ethanol cannot explain the runaway increase in the price of rice, which grows in very different conditions.

Biofuels caused an initial spike in prices, which then led to panic, export protectionism and speculation in commodities futures — and these latter factors have increased prices much further. To protect domestic consumers from rising world prices, dozens of governments have curbed the export of rice and wheat — principally Argentina, Brazil, Russia, China, India, Ukraine, Vietnam, Cambodia, Pakistan, Egypt, and Indonesia.

Export controls have reduced the amount of rice and wheat available for world trade. The FAO estimates that world trade in rice will fall from 34.7 million tons in 2007 to 28.7 million tons in 2008, and trade in wheat from 113 million tons to 106 million tons. Actual trade may fall even more, as more and more countries impose export controls. Absent these limitations, it would be inconceivable for trade in grain to contract so sharply after record world harvests.

Countries limiting exports hope to reduce hoarding, which could send prices even higher. India has set limits on the stocks that each trader can hold.

“Export controls have reduced the amount of rice and wheat available for world trade.”

But countries imposing export controls, have, in effect, become hoarders themselves, creating an artificial scarcity in the world market, and an artificially high world price. Farmers know what their crops could fetch on the world market, so they demand higher prices at home. And around and around we go.

This has eerie similarities to the Great Depression, when many countries resorted to import protection to protect jobs at home, and simultaneously devalued their currencies to try and push up exports. Yet the Great Depression got worse, thanks to what John Maynard Keynes called the fallacy of composition.

If one country alone resorts to import protection and devaluation, it can temporarily increase jobs. But at a global level, one country’s exports are another’s imports. If all countries reduce their imports, they unwittingly end up reducing their exports, too. And job losses get worse.

Today, each country wants to curb agricultural exports and stimulate imports to reduce prices. But if every country limits exports, the result is a decline in world imports, so prices rise instead of falling.

Solving the problem may require coordinated international action. After the Great Depression, the world community created the Global Agreement on Tariffs and Trade — which later morphed into the World Trade Organization — to negotiate simultaneous cuts in import barriers by major trading powers. This coordinated approach thwarted free riders, and gradually gained acceptance by all.

The new developments may improve the prospects of the Doha Round. But quick action is needed to tackle rising hunger. The WTO should convene an emergency meeting for countries to jointly reduce export controls. Even modest concessions can be in exporters’ self-interest, as they would cause world prices to fall sharply, and thus ease domestic price pressures.

The terrible irony is that world grain production will be at a record high in 2008. People are hungry, and it’s not because there isn’t enough food to go around.